Why?
The Cost of Living Adjustment (COLA) is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. If this factor increases year-over-year, then a COLA can be applied to Social Security benefits. This is an automatic adjustment, no action is required of Congress to produce the increase when there is one. See How Social Security COLAs Are Calculated for details on the calculations.
When the COLA was being calculated for 2016 benefits, the CPI-W average for the third quarter of 2015 (233.278) actually decreased versus the third quarter 2014 average (234.242), a reduction of -0.41%. So by definition there can be no increase for the coming year. Depending upon how the average goes in the third quarter of 2016, there may or may not be a COLA increase for 2017. If the increase (assuming there is an increase) to the CPI-W is less than the decrease we saw for 2015, there will again be no COLA increase. If the increase is anything more than the 2015 decrease, there will be an automatic COLA increase for 2016.
Since the calculations (begun in 1972) thankfully did not provide for a reduction in benefits when the change in CPI-W was negative, any negative change must be overridden by increases before additional COLA increases will be factored in. This is what happened in 2011 – even though we had an increase in the CPI-W from 2009 to 2010, the CPI-W was still a net negative from 2008 to 2010, and therefore there was no COLA for 2011.
Medicare Part B Impact
Medicare Part B premiums also increase regularly, albeit by a different scale. The Part B increase is based on the cost of healthcare, which is different from the CPI-W. As you may have read elsewhere, since there is no COLA increase for 2016 most (70%) of all folks paying this premium will not have to pay the increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by most beneficiaries will not be decreased.
If you are not paying for your Medicare Part B premiums via withholding from your Social Security check, you will see an increase in your Medicare Part B premium – from $104.90 to $123.70 – which was a positive outcome from the BBA2015. Instead of the 52% increase originally calculated, this increase was limited to an increase of “only” 17.9% for 2016. Also, if you start Medicare in 2016, you’ll get to pay the brand-new increased Part B premium.
Wage Base and Earnings Limits Remain Unchanged as Well
In addition to the lack of an increase to benefits, the reduction in the CPI-W also resulted in a freeze of the Social Security taxable wage base. This is the amount of W2 or self employment income that is subject to Social Security taxation for the calendar year. In both 2015 and 2016 this wage base is $118,500. The last time this changed was from 2014 to 2015, when the wage base increased from $117,000 to the current $118,500.
A substantial earnings year (for the purpose of eliminating WEP) will also remain at the same level as 2015 – $22,050 for 2016.
Lastly, the Earnings Test limits for Social Security will also remain the same in 2016 as they have been for 2015. For folks who are receiving Social Security benefits that are younger than Full Retirement Age, the Earnings Test limit is $15,720, and $41,880 if you will reach age 66 in 2016.